Enbridge Gateway Win Shows Stopping Keystone Won’t Halt Oil

Dec. 20 (Bloomberg) -- Keystone XL backers say the
proliferation of alternative projects, such as one to carry oil-sands crude to a Canadian seaport that advanced yesterday,
undercuts opponents who claim blocking the pipeline will keep
the high-carbon fossil fuel in the ground.

Canadian energy regulators yesterday recommended approval
with conditions of Enbridge Inc.’s Northern Gateway pipeline, a
project that would bring as much as 525,000 barrels a day of
crude to Kitimat, British Columbia. The recommendation, by the
National Energy Board, leaves the final decision up to the
federal government.

The ruling follows an expansion of rail terminals to haul
crude and other proposals, such as one by Kinder Morgan Energy
Partners LP to almost triple the capacity of a line to
Vancouver, or TransCanada Corp.’s plan to convert a gas line to
oil. Imperial Oil Ltd., an oil-sands producer, and Kinder Morgan
are planning a 100,000 barrel-a-day loading terminal in Edmonton
to handle as many as three trains a day, and its capacity may
more than double in the future, the companies said today.

“The fact that there are other routes means that the
pipeline isn’t a significant source of emissions,” said Kevin
Book, managing director of ClearView Energy Partners LLC, a
Washington-based consultant. High-carbon Canadian crude is
finding its way to market without Keystone XL, he said in an
interview.

Environmental Flashpoint

President Barack Obama has said he won’t approve
TransCanada’s application to build the Keystone line between
Alberta’s oil sands and U.S. Gulf Coast refineries if it were
found to substantially boost carbon-dioxide emissions, which
scientists say are raising the Earth’s temperature.

“To say yes on the terms that the president has
established, there have to be other pathways for the crude to
get to market,” Book said.

Keystone has emerged as a flashpoint in the debate over
global warming. Pipeline critics say the project poses a risk to
the climate because it would encourage increased production from
Alberta’s oil sands, a process that releases more carbon dioxide
than the extraction of some conventional forms of oil.

Environmental groups such as Sierra Club and the Natural
Resources Defense Council oppose Keystone and say it would
exacerbate global warming.

State Department

“Keystone is critical for expansion of tar sands and that
remains the case even with the further developments in the
existing pipeline proposals,” Susan Casey-Lefkowitz, director
of international programs at the Natural Resources Defense
Council, said in an interview. “If Keystone is rejected, its
going to have a significant impact on the expansion plans for
tar sands.”

The U.S. State Department is completing a final report
assessing the environmental risks of building the proposed $5.4
billion project. A draft version released in March found that
Keystone wouldn’t have a big climate impact because oil sands
would be developed even if the administration blocked the
project, with the crude moving by rail or other pipelines
instead. The U.S. Environmental Protection Agency and others
disputed that conclusion.

Kinder Morgan wants to almost triple the size of its Trans
Mountain pipeline from near Edmonton, Alberta, to Vancouver to
890,000 barrels a day, by 2017. TransCanada is considering
converting a gas line to oil so it could transport as much as
1.1 million barrels a day of crude to refineries in eastern
Canada.

Other Hurdles

“The State Department is generally right,” Michael
McKenna, a Republican strategist and president of MWR Strategies
Inc., a Midlothian, Virginia-based lobbying firm, said in an
interview. “That oil is going to come to market.”

Not all proposals to haul oil sands will come to fruition.
Almost a decade after it was proposed, the C$7.9 billion ($7.4
billion) Northern Gateway project still faces opposition from
aboriginal groups, including the Yinka Dene Alliance as well as
the Haisla and Haida First Nations. In addition, the pipeline is
opposed by the New Democratic Party, Canada’s official
opposition party. Yesterday’s ruling by the regulators
recommended 209 conditions, including assurances the project
would not endanger the environment and that the company has an
emergency response plan.

Keystone Delays

The city council in South Portland, Maine, this month voted
to place a 180-day moratorium on development related to hauling
oil sands by pipeline through the city. Rail transport costs
more than pipelines, poses its own safety risks and will lead to
8 percent more greenhouse gas emissions than if Keystone were
built, according to the State Department.

TransCanada says delays in building the Keystone XL
pipeline have resulted in more crude shipments by rail, which
creates higher carbon emissions.

“What has actually occurred in the marketplace would
corroborate the accuracy of those estimates, where they said
rail and other things would allow the oil sands to continue to
develop and Keystone wouldn’t have any impact on either refining
or production,” TransCanada Chief Executive Officer Russ
Girling said yesterday in an interview at Bloomberg’s Toronto
office.

World demand for oil won’t decrease even if oil-sands
production is halted, he said. “Consumption is where you get
GHG emissions and as long as that consumption is met by some
barrel, there is no net increase in GHG emissions.”

Venezuelan Alternatives

If oil-sands production is shut down, the U.S. will import
crude from other places such as Venezuela, where emissions
associated with crude production and consumption are higher on
average than in the oil sands, he said.

Keystone could carry 830,000 barrels of oil a day to U.S.
refiners. By comparison, an average of 175,000 barrels of oil
were imported by rail each day this year, about 75,000 barrels
of it heavy oil, according to the Canadian Association of
Petroleum Producers, an industry group. About 45,000 barrels of
oil was shipped to the U.S. daily on average in 2012, according
to the group.

Oil-sands producers including MEG Energy Corp. and Cenovus
Energy Inc. say they have booked capacity on rail cars in order
to work around pipeline bottlenecks.

2008 Application

TransCanada applied for a permit to build Keystone XL in
September, 2008. The State Department is reviewing the project
because it crosses an international border.

Obama rejected the initial application after officials in
Nebraska said the pipeline would imperil a sensitive ecosystem.
TransCanada, which is headquartered in Calgary, re-applied in
May 2012 with a new route through Nebraska, which has won
approval from state officials.

As the environmental review has dragged on, investments in
rail cars that carry crude have risen. The capacity of rail
terminals to load crude oil in Alberta and Saskatchewan will
quadruple by the end of next year to 905,000 barrels a day from
224,000 currently, according to an Aug. 26 report by Calgary
investment bank Peters & Co.

“Rail seems to be an option for light sweet crudes,”
Casey-Lefkowitz said. “What we’re seeing in practice is that
companies aren’t willing to pay the high cost that transporting
raw bitumen by rail.”

Climate Change

In their fight against Keystone, opponents have zeroed in
on the section of the draft State Department report that
concludes the pipeline wouldn’t worsen climate change because
the oil would make its way to market anyway, by rail or other
means.

NextGen Climate Action, a group funded by billionaire
investor and pipeline foe Tom Steyer, sponsored an event in
Washington this month designed to rebut that assessment.

“The pipeline changes the economics of this and makes it
profitable for people to develop a ton more of it,” Steyer, the
founder of Farallon Capital Management LLC, said in an
interview. In September, Steyer said he would spend $1 million
on an ad campaign against Keystone.

Even if Keystone XL is built, more pipelines and rail cars
will be needed to handle the projected growth in oil sands
output, according to the Canadian producers group. Canadian
production is forecast to grow more than 50 percent to 4.9
million barrels a day by 2020, while U.S. output expands 37
percent to 11.1 million barrels, the International Energy Agency
said in its World Energy Outlook in November.

An RBC Capital Markets report in September said that
without Keystone, as much as 300,000 barrels of oil a day in
development in the oil sands could be delayed. Increased
reliance on rail in lieu of the pipeline could benefit companies
including Burlington Northern Santa Fe, a unit of Berkshire
Hathaway Inc., that carry crude to refineries.

“Oil sands are either going to come to market or not come
to market on the basis of underlying oil prices,” McKenna said.
“Stopping Keystone isn’t going to stop the oil sands.”